Imagine you are driving home from the store when a child darts into the street. You swerve to avoid him, and in the process, run head first into another car. After it’s all said and done, you are sued by the other driver for the costs of her extensive medical care and car repairs. Could she end up getting your house? What about your retirement savings?
Across the country, newspaper headlines are packed with news of multimillion dollar court judgments for plaintiffs. These rulings can provide important relief and support for injured parties. However, they can also bankrupt defendants. Protecting yourself from a large legal judgment may be the last thing on your mind; however, if something goes wrong, you will be thankful for any and all prior planning.
State laws offer varying levels of protection against legal judgments. Therefore, it is important to research your state’s laws. Nevertheless, a few general principals do apply. In all cases, you must be proactive. You cannot move or otherwise act to protect your assets from a legal judgment after you have been sued or had an accident for which you might be liable. Courts look negatively upon such moves. Consequently, whatever actions you do decide to take to protect yourself must be done ahead of time.
So what exactly could a large legal judgment put at risk? Again, this depends on your specific state laws, but there are some general rules. Any 401(k) plans and company pension benefits are likely protected. IRAs are another matter-their vulnerability will depend on where you live and whether the judgment forces you to declare bankruptcy. Life insurance policies are usually safe, as are any proceeds being paid to you from another person’s policy. However, if you take such proceeds in a lump sum, a court judgment may be able reach them.
A major worry for many people facing a large legal judgment is their home. Since your house is often your largest investment, and at the end of the day, it is the place your loved ones call home, it may make sense to start liability planning here. In most states, a primary residence (meaning the place you intend to live most of the time) is protected to some degree from legal judgments. Some states place limits on the amount of value that will be protected, but these caps can vary.
Likely, your best bet to protect your home and other assets is to make sure you have adequate insurance coverage. Liability insurance is the most common insurance used to protect home owners. The liability portion of your homeowners’ insurance is designed to cover unintentional injuries on your property and unintentional damage to other people’s property-in other words, injuries caused by your negligence are covered, but not injuries inflicted on purpose.
If you have significant assets, you may also want to consider taking out an umbrella policy. For an additional fee, an umbrella policy protects you from a big judgment that might quickly eat up your regular coverage. These policies are relatively inexpensive because the insurers are betting you’ll never need them. The coverage picks up where your home and auto policies leave off, so in order to obtain one, you have to have certain levels of basic home and auto liability insurance. You also have to meet certain eligibility requirements, such as owning no more than a certain number of cars and not having been convicted of driving under the influence in the recent past.
Because no two policies are the same, it is important to carefully study yours and know what will and will not cover. Read the fine print. You may need additional coverage if you have a home-based business or natural or manmade attractions on your property, such as a pond or pool. Regardless of what form of protection you pick, at the bottom line, all that matters is that you and your family are protected!